The apartment investment industry—like many other asset classes—recently experienced a massive bubble. Peaking in the period from 2020 to mid-2022, this particular bubble was driven by multiple factors.
As a proximate cause, risky bridge loans came to dominate apartment investment. These loans made short-term, high leverage, floating-rate debt the norm when acquiring apartment properties. As an ultimate cause, however, the American fiscal-monetary milieu of taxation, redistribution, artificially-low interest rates, and easy money—culminating in the creation of trillions of dollars out of thin air in 2020—provided the driving force.
Besides malinvestment and mispricing, the apartment bubble of 2020-2022 predictably gave rise to charlatans and crooks of many varieties. Riding high during the bubble, some of the most conspicuous syndicators have taken a dramatic turn for the worse.
Tides Equities
Sean Kia and Ryan Andrade—heads of California-based Tides Equities—are not very bright. But they’re just smart enough to know the extent of their intellectual and analytical deficiencies. For this reason, they were quite active during the aforementioned apartment bubble.
Sensing the chance to grow in an environment where procuring loans had never been easier and American savers had limited investment options due to ZIRP, Kia and Andrade set to work acquiring a large, but fundamentally unattractive, portfolio of apartment properties—mainly in the trendy Sunbelt markets—with other people’s money.
Consistently outbidding legions of other buyers who were not quite as unscrupulous, Tides grew by leaps and bounds, topping out at roughly 30,000 apartment units and $7 billion in assets under management. As apartment owners go, they were among the largest—for a brief time. With each acquisition, Kia and Andrade saw their personal fortunes grow. In the private equity business broadly—apartments being no exception—fees to sponsors are paid upfront when a deal closes. Usually around 2 percent of gross deal size, acquisition fees can accumulate rapidly when assets under management grow by billions, as in the case of Tides.
While bridge loans are generally non-recourse—lenders can’t come after sponsors personally for monetary defaults—Kia and Andrade were compelled to sign personal guarantees for some of the loans they procured during their acquisition binge. As their apartment portfolio foundered after interest rates rose in 2022, loan defaults rose dramatically. Along with—and because of—the financial shortfalls that occurred at their properties subsequent to the Fed’s rate increases, the specific promises made by Kia and Andrade in their personal guarantees were broken.
A November report by The Real Deal noted that Acres Capital—a Tides lender that recently foreclosed on one of their properties in Dallas—is suing Kia and Andrade in New York Supreme Court for failure to fulfill three specific parameters of their personal guaranty, namely, failing to purchase an interest rate cap on their loan, allowing unpaid vendors to encumber the property with mechanic’s liens, and failing to complete promised renovations. Acres wants more than $13 million from the Tides founders.
A follow-up December report, also from The Real Deal, noted two more lenders were pursuing Kia and Andrade personally. Starwood Mortgage Capital and Rialto Capital Advisors—two prominent names in the commercial real estate loan servicing world—are each suing the Tides founders for issues similar to those in the Acres lawsuit. Starwood is suing Kia and Andrade for more than $18 million related to loans on two Texas properties and one Phoenix property, while Rialto is suing for at least $5 million related to a loan on yet another Texas property.
Among the aforementioned suits, Andrade and Kia are potentially liable for over $30 million and at least $26 million, respectively. The two Californians are apparently facing personal bankruptcy. It is possible that Acres, Starwood, and Rialto are only the beginning of these personal recourse lawsuits against the Tides founders. Other Tides lenders are likely to follow suit as property defaults and personal recourse violations pile up.
GVA
Alan Stalcup—founder of Austin-based GVA Real Estate Group—is another example of how not to run an investment management operation—or live life, in general. In similar fashion to Tides, GVA built up an enormous portfolio of middling-quality apartment assets in the Sunbelt using bridge loans during the bubble, culminating in $7 billion in assets under management before interest rates rose in 2022 and a slew of defaults shattered the illusion of growth.
Stalcup is now being sued by multiple investors for outright fraud. In one complaint, it states: “With his real estate empire crumbling and his debts and creditors mounting, Stalcup has begun attempting to hide his and GVA’s assets…” Stalcup’s absolute dearth of investment management expertise combined with a background in golf marketing apparently did little for his risk management skills.
The Chigurh Principle
Tides and GVA—led by their respective founders—are just the two most visible cases among apartment syndicators of poor decision-making and lack of moral clarity leading to massive financial loss. In a sector where 95 percent of the underlying property loans are facing some level of distress, innumerable apartment syndicators not only lost billions in equity for their investors, but are seeing their personal finances dissolve as well.
In the 2007 Oscar-winning best picture, No Country for Old Men, fictional villain Anton Chigurh asks one of his unlucky victims before the latter’s demise, “If the rule you followed brought you to this, of what use was the rule?”
Apartment syndicators that succumbed to the feverish madness of the most recent Fed- and government-induced malinvestment bubble nevertheless committed fully to an ethically and morally shady scheme. They planned to leverage newly-created money and the savings of average Americans into their own personal wealth, ignoring any risk to those investors or the impact such a scheme might have on their own reputations, such as they were.
But throwing around funny money does not an investor make. And in the carelessness that characterized their execution, these syndicators eschewed a healthy fear of failure and signed legal documents the import of which they failed to appreciate. In short, they made the classic neophyte’s mistake of shunning a sound process—comprising careful analysis, low time preference, and emotional discipline—while chasing short-term results.
The rule they followed involved rent-seeking instead of providing real value. It prioritized guile over integrity and slick salesmanship over merit. In the end, pursuing this path only brought them infamy and bankruptcy—financial and moral.
